Facebook's pointless fear

Barry Randall manages the
Crabtree Technology model on
Covestor, an online marketplace for investment management. He is founder and
Chief Investment Officer at Crabtree Asset
Management, a registered investment adviser based in Saint Paul, MN. With 18
years in the financial services business, Barry has progressed from junior
sell-side analyst to award-winning senior portfolio manager, personally
responsible for public and private portfolios holding as much as $650 million in
assets.

It's interesting to see the lengths to which Mark Zuckerberg is going to avoid taking Facebook
FB, -6.32%
public. Never mind that Facebook has actually filed to go public with the SEC and is in the midst of their road show this week. You'd think poor Mark was trying to avoid going to the dentist.

But, of course, the moment that Facebook accepted its first venture capital from Accel Partners in 2005, Zuckerberg implicitly agreed to eventually take the company public, even if he didn't understand it at the time. And in becoming a public company, the shareholders will be in charge. Well, mostly. Thanks to Facebook's dual share classes, Zuckerberg will continue to control 57% of the voting power.

As someone who has analyzed technology IPOs for nearly 20 years, I'm continually fascinated with CEOs' fear of becoming a public company. Often this fear centers around a company's relationship with "Wall Street" and its supposed "fixation on short-term results." When Google went public eight years ago, its founders included a letter within the IPO prospectus that served as a kind of manifesto of independence from dreaded Wall Street pressures. It included the following sentence:

Facebook's own IPO prospectus includes the following passage in its Risk Factors section:

"Our culture also prioritizes our user engagement over short-term financial results, and we frequently make product decisions that may reduce our short-term revenue or profitability[.]"

I suppose investors should be grateful that these great and glorious enterprises have deigned to alert us to their principled stand against myopia and abeyance to the baser impulses of the money changers. Thank you, lords, for warning us!

But these "protest-to-much" memos from soon-to-be billionaires mostly serve to reinforce their self-importance. And self-importance is a common characteristic of technology CEOs, quite a few of whom are no longer CEOs, and not because they didn't "make the quarter." Scott McNealy of Sun Microsystems, Ken Olsen of Digital Equipment, and Messrs. Balsillie and Lazaridis of Research in Motion
RIMM
are just four former tech titans, brought low not because they didn't play Wall Street's “games,” but simply because their firms' products attracted fewer and fewer buyers.

Here's the secret to running a public company, Mark: communication and execution. Describe what you plan to do and how you're going to do it. Tell us what your business model is and how it differs from others'. Make your best projection on what you plan to spend. Then execute on those plans and the opportunities in front of you.

The truth is that great long-term performance, where you achieve all your and your company's goals, is nothing but a series of great short-term performances. Feel free to lose money in a quarter, if that is the way forward. Feel free to make a transformative acquisition that requires all your available cash, so long as you mentioned previously that it was a possibility. Feel free to accelerate your capital spending plans, if per your prior quarterly comments, you noted a rising competitive threat. If you keep your investors informed of your plans, and then largely execute upon them, then you have nothing to fear from the great Wall Street analyst hydra.

Think I'm kidding? Look at Intuit
INTU, -1.69%
a public company since 1993. Look at a chart of INTU's share price, which, as we say here on Wall Street, has consistently gone "up and to the right." Now consider that in Intuit's early days, including for years after going public, the company lost money in one or even two of its quarters every year. Heavens! They lost money? Gah! Circle the wagons! Issue a news release!

But Intuit didn't have anything to fear. First and most important, Intuit's tax and accounting products progressively found more and more customers. And second, the company's leaders, including founder Bill Campbell and long-time CEO Scott Cook consistently explained the seasonality in their business (tax software, go figure) and how revenues might rise and fall, but expenses were more constant, hence, the money-losing quarters. Meanwhile Intuit bought and sold companies, hired and fired people and generally just got on with it. Two dollars invested in INTU in 1993 is now worth $56.

Facebook can enjoy a similar ride, provided it follows the same path as Intuit: communicate and execute, each and every quarter. But fail to do either, or worse, both and the outcome will be less pleasant.

Open wide (your plans) — this won't hurt a bit.

This commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

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